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AMERICAN POWER 183

here. Over the last twenty years, globalization has been gain­
ing breadth and depth. More countries are making goods,
communications technology has been leveling the playing
field, capital has been free to move across the world. And
America has benefited massively from these trends. Its econ­
omy has received hundreds of billions of dollars in investment
—a rarity for a country with much capital of its own. Its com­
panies have entered new countries and industries with great
success and used new technologies and processes, all to keep
boosting their bottom lines. Despite two decades of a very
expensive dollar, American exports have held ground.

G D P growth, the bottom line, has averaged just over 3 per­
cent for twenty-five years, significantly higher than in Europe.
(Japan's averaged 2.3 percent over the same period.) Produc­
tivity growth, the elixir of modern economics, has been over
2.5 percent for a decade now, again a full percentage point
higher than the European average. The United States is cur­
rently ranked as the most competitive economy in the world
by the World Economic Forum. These rankings have been
produced every year since 1979, and the U.S. position has
been fairly constant, slipping sometimes in recent years to
small northern European countries like Sweden, Denmark,
and Finland (whose collective population is twenty million,
less than that of the state of Texas). America's superior growth
trajectory might be petering out, and perhaps its growth will
be more "normal" for an advanced industrial country for the
next few years. But the general point—that America is a highly
dynamic economy at the cutting edge, despite its enormous
size—still holds.

Look at the industries of the future. Nanotechnology—
applied science dealing with the control of matter at the

184 T H E P O S T - A M E R I C A N W O R L D

atomic or molecular scale—is considered likely to lead to fun­
damental breakthroughs over the next fifty years. At some
point in the future, or so I'm told, households will construct
products out of raw materials, and businesses will simply cre­
ate the formulas that turn atoms into goods. Whether this is
hype or prescience, what is worth noticing is that by every
conceivable measure, the United States dominates the field.
It has more dedicated nanocenters than the next three
nations (Germany, the United Kingdom, and China) com­
bined, and many of its new centers focus on narrow subjects
with a high potential for practical, marketable applications—
such as the Emory-Georgia Tech Nanotechnology Center for
Personalized and Predictive Oncology. At market exchange
rates, government nanotech funding in the United States is
almost double that of its closest competitor, Japan. And while
China, Japan, and Germany contribute a fair share of journal
articles on nanoscale science and engineering topics, the
United States has issued more patents for nanotechnology
than the rest of the world combined, highlighting America's
unusual strength in turning abstract theory into practical
products.

The firm Lux, led by Dr. Michael Holman, constructed a
matrix to assess countries' overall nanotech competitiveness.
Their analysis looked not just at nanotechnology activity but
also at the ability to "generate growth from scientific innova­
tion."12 It found that certain countries that spend much on
research can't turn their science into business. These "Ivory
Tower" nations have impressive research funding, journal arti­
cles, and even patents, but somehow don't manage to trans­
late this into commercial goods and ideas. China, France,
and even Britain fall into this category. A full 85 percent of

AMERICAN POWER 185

venture capital investments in nanotechnology went to U . S .
companies.

Biotechnology—a broad category that describes the use of
biological systems to create medical, agricultural, and indus­
trial products—is already a multibillion-dollar industry. It, too,
is dominated by the United States. More than $3.3 billion in
venture financing went to U.S. biotech companies in 2005,
while European companies received just half that amount.
Follow-on equity offerings (that is, post-IPO) in the United
States were more than seven times those in Europe. And while
European IPOs attracted more cash in 2005, I P O activity is
highly volatile—in 2004, U.S. IPO values were more than four
times Europe's. As with nanotechnology, American companies
excel at turning ideas into marketable and lucrative products.
U.S. biotech revenues approached $ 5 0 billion in 2005, five
times greater than those in Europe and representing 76 per­
cent of global revenues.*

Manufacturing has, of course, been leaving the United
States, shifting to the developing world and turning America
into a service economy. This scares many Americans and
Europeans, who wonder what their countries will make if
everything is "made in China." But Asian manufacturing must
be viewed in the context of a global economy in which coun­
tries like China have become an important part of the supply
chain—but still just a part.

* Of course, information from public companies represents only part of the picture,
because more than three-quarters of the world's 4 , 2 0 3 biotech companies are held pri­
vately. Europe has a larger share of the world's private biotech companies, represent­
ing 42 percent of the total (compared with 3 1 percent in America). The United States,
by contrast, is home to a greater share of public biotech companies ( 5 0 percent versus
Europe's 18 percent), perhaps indicating the greater maturity of the U.S. market.

186 T H E P O S T - A M E R I C A N W O R L D

The Atlantic Monthly writer James Fallows spent a year in
China watching that manufacturing juggernaut up close, and
he provides a persuasive explanation—one well understood
by Chinese businessmen—of how outsourcing has strength­
ened American competitiveness. Most Americans, even
management experts, have not heard of the "smiley curve."
But Chinese manufacturers know it well. Named for the U-
shaped smile on the simple 1970s cartoon of a happy face,

the curve illustrates the development of a product, from
conception to sale. At the top left of the curve one starts with
the idea and high-level industrial design—how the product
will look and work. Lower down on the curve comes the
detailed engineering plan. At the bottom of the U is the
actual manufacturing, assembly, and shipping. Then rising
up on the right of the curve are distribution, marketing, retail
sales, service contracts, and sales of parts and accessories.
Fallows observes that, in almost all manufacturing, China
takes care of the bottom of the curve and America the top—
the two ends of the U—which is where the money is. "The
simple way to put this—that the real money is in the brand
name, plus retail—may sound obvious," he writes, "but its
implications are illuminating."13 A vivid example of this is the
iPod: it is manufactured mostly outside the United States,
but the majority of value added is captured by Apple, Inc. in
California. The company made $ 8 0 in gross profit on a 30-
gigabyte video iPod that retailed (in late 2007) for $299. Its
profit was 36 percent of the estimated wholesale price of
$224. (Add to that the retail profit if it was sold in an Apple
store.) The total cost of parts was $ 1 4 4 . 1 4 Chinese manufac­
turers, by contrast, have margins of a few percent on their
products.

AMERICAN POWER 187

America's Best Industry

"Ah yes," say those who are more worried, "but you're look­
ing at a snapshot of today. America's advantages are rapidly
eroding as the country loses its scientific and technological
base." For some, the decline of science is symptomatic of a
larger cultural decay. A country that once adhered to a Puri­
tan ethic of delayed gratification has become one that revels
in instant pleasures. We're losing interest in the basics—
math, manufacturing, hard work, savings—and becoming a
postindustrial society that specializes in consumption and
leisure. "More people will graduate in the United States in
2006 with sports-exercise degrees than electrical-engineering
degrees," says General Electrics C E O , Jeffrey Immelt. "So,
if we want to be the massage capital of the world, we're well
on our way."15

No statistic seems to capture this anxiety better than
those showing the decline of engineering. In 2005, the
National Academy of Sciences released a report warning
that the United States could soon lose its privileged position
as the world's science leader. In 2004, the report said, China
graduated 600,000 engineers, India 350,000, and the
United States 70,000. These numbers were repeated in hun­
dreds of articles, books, and blogs, including a Fortune cover
story, the Congressional Record, and speeches by technology
titans like Bill Gates. And indeed, the figure does seem like
cause for despair. What hope does the United States have if
for every qualified American engineer there are 11 Chinese
and Indian ones? For the cost of one chemist or engineer in
the United States, the report pointed out, a company could

188 T H E P O S T - A M E R I C A N W O R L D

hire 5 well-trained and eager chemists in China or 11 engi­
neers in India.

The only problem is that the numbers are wildly off the
mark. A journalist, Carl Bialik of the Wall Street Journal, and
several academics investigated the matter. They quickly real­
ized that the Asian totals included graduates of two- and
three-year programs—people getting diplomas in simple tech­
nical tasks. A group of professors at the Pratt School of Engi­
neering at Duke University traveled to China and India to
collect data from governmental and nongovernmental sources
and interview businessmen and academics. They concluded
that eliminating graduates of two- or three-year programs
halves the Chinese figure, to around 350,000 graduates, and
even this number is probably significantly inflated by differing
definitions of "engineer" that often include auto mechanics
and industrial repairmen. Bialik notes that the National Sci­
ence Foundation, which tracks these statistics in the United
States and other nations, puts the Chinese number at about
200,000 degrees per year. Ron Hira, a professor of public pol­
icy at the Rochester Institute of Technology, puts the number
of Indian graduates at 120,000-130,000 a year. That means
the United States actually trains more engineers per capita
than either India or China does.16

And the numbers don't address the issue of quality. As
someone who grew up in India, I have a healthy appreciation
for the virtues of its famous engineering academies, the Indian
Institutes of Technology (IIT). Their greatest strength is that
they administer one of the world's most ruthlessly competitive
entrance exams. Three hundred thousand people take it, five
thousand are admitted—an acceptance rate of 1.7 percent
(compared with 9 to 10 percent for Harvard, Yale, and Prince-

AMERICAN POWER 189

ton). The people who make the mark are the best and bright­
est out of one billion. Place them in any educational system,
and they will do well. In fact, many of the IITs are decidedly
second-rate, with mediocre equipment, indifferent teachers,
and unimaginative classwork. Rajiv Sahney, who attended IIT
and then went to Caltech, says, "The IITs' core advantage is
the entrance exam, which is superbly designed to select
extremely intelligent students. In terms of teaching and facili­
ties, they really don't compare with any decent American tech­
nical institute." And once you get beyond the IITs and other
such elite academies—which graduate under ten thousand
students a year—the quality of higher education in China and
India remains extremely poor, which is why so many students
leave those countries to get trained abroad.

The data affirm these anecdotal impressions. In 2005, the
McKinsey Global Institute did a study of "the emerging global
labor market" and found that a sample of twenty-eight low-
wage countries had approximately 33 million young profes­
sionals* at their disposal, compared with just 15 million in a
sample of eight higher-wage nations (the United States,
United Kingdom, Germany, Japan, Australia, Canada, Ire­
land, and South Korea).17 But how many of these young pro­
fessionals in low-wage countries had the skills necessary to
compete in a global marketplace? "Only a fraction of potential
job candidates could successfully work at a foreign company,"
the study reported, pointing to several explanations, chiefly
poor educational quality. In both India and China, it noted,

* MGFs figure includes graduates trained in engineering, finance and accounting, life
science research, and "professional generalists," such as call center operatives. Young
professionals are defined as graduates with up to seven years of experience.

190 T H E P O S T - A M E R I C A N W O R L D

beyond the small number of top-tier academies, the quality
and quantity of education is low. Only 10 percent of Indians
get any kind of postsecondary education. Thus, despite enor­
mous demand for engineers, there are relatively few well-
trained ones. Wages of trained engineers in both countries are
rising by 15 percent a year, a sure sign that demand is outstrip­
ping supply. (If you were an employer and had access to tens
of thousands of well-trained engineers coming out of colleges
every year, you would not have to give your employees 15 per­
cent raises year after year. )

Higher education is America's best industry. There are two
rankings of universities worldwide. In one of them, a purely
quantitative study done by Chinese researchers, eight of the
top ten universities in the world are in the United States. In
the other, more qualitative one by London's Times Higher Edu­
cational Supplement, it's seven. The numbers flatten out some­
what after that. O f the top twenty, seventeen or eleven are in
America; of the top fifty, thirty-eight or twenty-one. Still, the
basic story does not change. With 5 percent of the world's pop­
ulation, the United States absolutely dominates higher educa­
tion, having either 42 or 68 percent of the world's top fifty
universities (depending which study you look at). In no other
field is America's advantage so overwhelming.*

A 2006 report from the London-based Centre for European
Reform, "The Future of European Universities," points out
that the United States invests 2.6 percent of its G D P in higher
education, compared with 1.2 percent in Europe and 1.1 per-

* The right-wing attack on American universities as being out-of-touch ivory towers
has always puzzled me. In a highly competitive global environment, these institutions
dominate the field.

AMERICAN POWER 191

cent in Japan. The situation in the sciences is particularly strik­
ing. A list of where the world's 1,000 best computer scientists
were educated shows that the top ten schools are all Ameri­
can. U.S. spending on R&D remains higher than Europe's,
and its collaborations between business and educational insti­
tutions are unmatched anywhere in the world. America
remains by far the most attractive destination for students,
taking 30 percent of the total number of foreign students glob­
ally. All these advantages will not be erased easily, because the
structure of European and Japanese universities—mostly
state-run bureaucracies—is unlikely to change. And while
China and India are opening new institutions, it is not that
easy to create a world-class university out of whole cloth in a
few decades. Here's a statistic about engineers that you might
not have heard. In India, universities graduate between 35 and
50 Ph.D.'s in computer science each year; in America, the fig­
ure is 1,000.

Learning to Think

If American universities are first-rank, few believe that the
same can be said about its schools. Everyone knows that the
American school system is in crisis and that its students do
particularly badly in science and math, year after year, in inter­
national rankings. But the statistics here, while not wrong,
reveal something slightly different. America's real problem is
one not of excellence but of access. Since its inception in
1995, the Trends in International Mathematics and Science
Study (TIMSS) has become the standard for comparing edu­
cational programs across nations. The most recent results,

192 T H E P O S T - A M E R I C A N W O R L D

from 2003, put the United States squarely in the middle of the
pack. The United States beat the average score of the twenty-
four countries included in the study, but many of the countries
ranked below it were developing nations like Morocco,
Tunisia, and Armenia. Eighth-graders did better than fourth-
graders (the two grades measured) but still lagged behind
their counterparts in countries like Holland, Japan, and Singa­
pore. The media reported the news with a predictable pen­
chant for direness: "Economic time bomb: U.S. teens are
among worst at math," declared the Wall Street Journal.

But even if the U.S. scores in math and science fall well
below leaders like Singapore and Hong Kong, the aggregate
scores hide deep regional, racial, and socioeconomic varia­
tion. Poor and minority students score well below the Ameri­
can average, while, as one study noted, "students in affluent
suburban U.S. school districts score nearly as well as students
in Singapore, the runaway leader on TIMSS math scores."18
These are the students who then go on to compete for and fill
the scarce slots in America's top universities. The difference
between average science scores in poor and wealthy school
districts within the United States, for instance, is four to five
times greater than the difference between the U.S. and Singa­
porean national averages. In other words, America is a large
and diverse country with a real inequality problem. This will,
over time, translate into a competitiveness problem, because
if we cannot educate and train a third of the working popula­
tion to compete in a knowledge economy, it will drag down
the country. But we do know what works. The large cohort of
students in the top fifth of American schools rank along with
the world's best. They work hard and have a highly scheduled

AMERICAN POWER 193

academic and extracurricular life, as anyone who has recently
been to an Ivy League campus can attest.

I went to elementary, middle, and high school in Mumbai,
at an excellent institution, the Cathedral and John Connon
School. Its approach (thirty years ago) reflected the teaching
methods often described as "Asian," in which the premium is
placed on memorization and constant testing. This is actually
the old British, and European, pedagogical method, one that
now gets described as Asian. I recall memorizing vast quan­
tities of material, regurgitating it for exams, and then
promptly forgetting it. When I went to college in the United
States, I encountered a different world. While the American
system is too lax on rigor and memorization—whether in
math or poetry—it is much better at developing the critical
faculties of the mind, which is what you need to succeed in
life. Other educational systems teach you to take tests; the
American system teaches you to think.

It is surely this quality that goes some way in explaining why
America produces so many entrepreneurs, inventors, and risk
takers. In America, people are allowed to be bold, challenge
authority, fail, and pick themselves up. It's America, not Japan,
that produces dozens of Nobel Prize winners. Tharman Shan-
mugaratnam, until recently Singapore's minister of education,
explains the difference between his country's system and
America's. "We both have meritocracies," Shanmugaratnam
says. "Yours is a talent meritocracy, ours is an exam meritoc­
racy. We know how to train people to take exams. You know
how to use people's talents to the fullest. Both are important,
but there are some parts of the intellect that we are not able to
test well—like creativity, curiosity, a sense of adventure, ambi-

194 T H E P O S T - A M E R I C A N W O R L D

tion. Most of all, America has a culture of learning that chal­
lenges conventional wisdom, even if it means challenging
authority. These are the areas where Singapore must learn
from America."

This is one reason that Singaporean officials recently visited
U.S. schools to learn how to create a system that nurtures and
rewards ingenuity, quick thinking, and problem solving. As the
Washington Post reported in March 2007, researchers from
Singapore's best schools came to the Academy of Science, a
public magnet school in Virginia, to examine U.S. teaching
methods.19 As the students "studied tiny, genetically altered
plants one recent afternoon, drawing leaves and jotting data in
logbooks," the Singaporean visitors "recorded how long the
teacher waited for students to answer questions, how often the
teenagers spoke up and how strongly they held to their views."
Har Hui Peng, a visitor from Singapore's Hwa Chong Institu­
tion, was impressed, as the Post noted. "Just by watching, you
can see students are more engaged, instead of being spoon-fed
all day," said Har. The Post article continued, "[In Singapore],
she said, the laboratories are fully stocked but stark, and the
students are bright but reluctant to volunteer answers. To
encourage spontaneity, Hwa Chong now bases 10 percent of
each student's grade on oral participation."

While America marvels at Asia's test-taking skills, Asian
countries come to America to figure out how to get their kids
to think. Top high schools in Beijing and Shanghai are empha­
sizing independent research, science competitions, and entre­
preneur clubs. "I like the way your children are able to
communicate," said Rosalind Chia, another Singaporean
teacher on tour in the States. "Maybe we need to cultivate that
more—a conversation between students and teachers." Such

AMERICAN POWER 195

change does not corne easily. Indeed, Japan recently
attempted to improve the flexibility of its national education
system by eliminating mandatory Saturday classes and
increasing the time dedicated to general studies, where stu­
dents and teachers can pursue their own interests. "But the
Japanese shift to yutori kyoiku, or relaxed education," the Post
says, "has fueled a back-to-basics backlash from parents who
worry that their children are not learning enough and that test
scores are slipping." In other words, simply changing curricula
—a top-down effort—may lead only to resistance. American
culture celebrates and reinforces problem solving, questioning
authority, and thinking heretically. It allows people to fail and
then gives them a second and third chance. It rewards self-
starters and oddballs. These are all bottom-up forces that can­
not be produced by government fiat.

America's Secret Weapon

America's advantages might seem obvious when compared
with Asia, which is still a continent of mostly developing
countries. Against Europe, the margin is slimmer than many
Americans believe. The Eurozone has been growing at an
impressive clip, about the same pace per capita as the United
States since 2000. It takes in half the world's foreign invest­
ment, boasts labor productivity often as strong as that of the
United States, and posted a $30 billion trade surplus in 2007
from January through October. In the W E F Competitiveness
Index, European countries occupy seven of the top ten slots.
Europe has its problems—high unemployment, rigid labor
markets—but it also has advantages, including more efficient

196 T H E P O S T - A M E R I C A N W O R L D

and fiscally sustainable health care and pension systems. All in
all, Europe presents the most significant short-term challenge
to the United States in the economic realm.

But Europe has one crucial disadvantage. Or, to put it
more accurately, the United States has one crucial advantage
over Europe and most of the developed world. The United
States is demographically vibrant. Nicholas Eberstadt, a
scholar at the American Enterprise Institute, estimates that
the U . S . population will increase by 65 million by 2030,
while Europe's will remain "virtually stagnant." Europe,
Eberstadt notes, "will by that time have more than twice as
many seniors older than 65 than children under 15, with
drastic implications for future aging. (Fewer children now
means fewer workers later.) In the United States, by con­
trast, children will continue to outnumber the elderly. The
U.N. Population Division estimates that the ratio of
working-age people to senior citizens in western Europe will
drop from 3.8:1 today to just 2.4:1 in 2 0 3 0 . In the U.S., the
figure will fall from 5.4:1 to 3.1:1. Some of these demo­
graphic problems could be ameliorated if older Europeans
chose to work more, but so far they do not, and trends like
these rarely reverse."20 The only real way to avert this demo­
graphic decline is for Europe to take in more immigrants.
Native Europeans actually stopped replacing themselves as
early as 2007, so even maintaining the current population
will require modest immigration. Growth will require much
more. But European societies do not seem able to take in
and assimilate people from strange and unfamiliar cultures,
especially from rural and backward regions in the world of
Islam. The question of who is at fault here—the immigrant or
the society—is irrelevant. The political reality is that Europe

AMERICAN POWER 197

is moving toward taking in fewer immigrants at a time when
its economic future rides on its ability to take in many more.
America, on the other hand, is creating the first universal
nation, made up of all colors, races, and creeds, living and
working together in considerable harmony.

Surprisingly, many Asian countries—with the exception of
India—are in demographic situations similar to or even worse
than Europe's. The fertility rates in Japan, Taiwan, Korea,
Hong Kong, and China* are well below the replacement level
of 2.1 births per female, and estimates indicate that major
East Asian nations will face a sizable reduction in their
working-age population over the next half century. The
working-age population in Japan has already peaked; by 2010,
Japan will have three million fewer workers than in 2 0 0 5 .
Worker populations in China and Korea are also likely to peak
within the next decade. Goldman Sachs predicts that China's
median age will rise from thirty-three in 2 0 0 5 to forty-five in
2050, a remarkable graying of the population. By 2030, China
may have nearly as many senior citizens sixty-five years of age
or older as children under fifteen. And Asian countries have as
much trouble with immigrants as European ones. Japan faces
a large prospective worker shortage because it can neither take
in enough immigrants nor allow its women to fully participate
in the labor force.

The effects of an aging population are considerable. First,
there is the pension burden—fewer workers supporting more
gray-haired elders. Second, as the economist Benjamin Jones

* Birthrates in China could be underreported owing to the government's one-child
policy. However, the demographic consensus holds that the total fertility rate has
been below replacement level in China for fifteen years or more.

198 T H E P O S T - A M E R I C A N W O R L D

has shown, most innovative inventors—and the overwhelming
majority of Nobel laureates—do their most important work
between the ages of thirty and forty-four. A smaller working-
age population, in other words, means fewer technological,
scientific, and managerial advances. Third, as workers age,
they go from being net savers to being net spenders, with dire
ramifications for national saving and investment rates. For
advanced industrial countries—which are already comfort­
able, satisfied, and less prone to work hard—bad demograph­
ics are a killer disease.

The native-born, white American population has the same
low fertility rates as Europe's. Without immigration, U.S.
G D P growth over the last quarter century would have been
the same as Europe's. America's edge in innovation is over­
whelmingly a product of immigration. Foreign students and
immigrants account for 50 percent of the science researchers
in the country and, in 2006, received 4 0 percent of the doc­
torates in science and engineering and 65 percent of the doc­
torates in computer science. By 2010, foreign students will
get more than 5 0 percent of all Ph.D.'s awarded in every sub­
ject in the United States. In the sciences, that figure will be
closer to 75 percent. Half of all Silicon Valley start-ups have
one founder who is an immigrant or first-generation Ameri­
can. America's potential new burst of productivity, its edge in
nanotechnology, biotechnology, its ability to invent the
future—all rest on its immigration policies. If America can
keep the people it educates in the country, the innovation
will happen here. If they go back home, the innovation will
travel with them.

Immigration also gives America a quality rare for a rich
country—hunger and energy. As countries become wealthy,

AMERICAN POWER 199

the drive to move up and succeed weakens. But America has
found a way to keep itself constantly revitalized by streams of
people who are looking to make a new life in a new world.
These are the people who work long hours picking fruit in
searing heat, washing dishes, building houses, working night
shifts, and cleaning waste dumps. They come to the United
States under terrible conditions, leave family and community,
only because they want to work and get ahead in life. Ameri­
cans have almost always worried about such immigrants—
whether from Ireland or Italy, China or Mexico. But these
immigrants have gone on to become the backbone of the
American working class, and their children or grandchildren
have entered the American mainstream. America has been
able to tap this energy, manage diversity, assimilate newcom­
ers, and move ahead economically. Ultimately, this is what sets
the country apart from the experience of Britain and all other
historical examples of great economic powers that grow fat
and lazy and slip behind as they face the rise of leaner, hun­
grier nations.

The Macro Picture

Many experts, scholars, and even a few politicians worry
about a set of statistics that bode ill for the United States.
The savings rate is zero, the current-account deficit, trade
deficit, and budget deficit are high, median income is flat,
and commitments for entitlements are unsustainable. These
are all valid concerns and will have to be addressed by Wash­
ington. If America's economic system is its core strength, its
political system is its core weakness. But the numbers might

200 THE P O S T - A M E R I C A N W O R L D

not tell us everything we need to know. The economic statis­
tics that we rely on give us only an approximate, antiquated
measure o f an economy. Many of them were developed in
the late nineteenth century to describe an industrial econ­
omy with limited cross-border activity. We now live in an
interconnected global market, with revolutions in financial
instruments, technology, and trade. It is possible that we're
not measuring things correctly.

It used to be a law of macroeconomics, for example, that in
an advanced industrial economy there is such a thing as
NAIRU—the nonaccelerating inflation rate of unemploy­
ment. Basically, this meant that unemployment could not fall
below a certain level, usually pinned at 6 percent, without driv­
ing inflation up. But for the last two decades, many Western
countries, especially the United States, have had unemploy­
ment rates well below levels economists thought possible. Or
consider that America's current-account deficit—which in
2007 reached $800 billion, or 7 percent of GDP—was sup­
posed to be unsustainable at 4 percent of GDP. The current-
account deficit is at dangerous levels, but we should also keep
in mind that its magnitude can be explained in part by the fact
that there is a worldwide surplus of savings and that the
United States remains an unusually stable and attractive place
in which to invest.

Harvard University's Richard Cooper even argues that the
American savings rate is miscalculated, painting an inaccu­
rate picture of massive credit card debt and unaffordable
mortgages. While many households do live beyond their
means, the picture looks healthier at the aggregate level,
Cooper argues. Private U.S. savings, which includes both
household saving (the "often-cited" low figure of about 2 per-

AMERICAN POWER 201

cent of personal income) and corporate saving, reached 15
percent in 2 0 0 5 . The decrease in personal saving, in other
words, has been largely offset by an increase in corporate
saving. More important, the whole concept of "national sav­
ing" might be outdated, not reflecting the reality of new
modes of production. In the new economy, growth comes
from "teams of people creating new goods and services, not
from the accumulation of capital," which was more impor­
tant in the first half of the twentieth century. Yet we still
focus on measuring capital. The national accounts, which
include G D P and traditional measures of national saving,
were, Cooper writes, "formulated in Britain and the United
States in the 1930s, at the height of the industrial age."21

Economists define saving as the income that, instead of
going toward consumption, is invested to make possible con­
sumption in the future. Current measures of investment focus
on physical capital and housing. Cooper argues that this mea­
sure is misleading. Education expenditures are considered
"consumption," but in a knowledge-based economy, education
functions more like savings—it is spending forgone today in
order to increase human capital and raise future income and
spending power. Private R&D, meanwhile, isn't included in
national accounts at all, but rather considered an intermediate
business expense—even though most studies suggest that
R&D on average has a high payoff, much higher than invest­
ing in bricks and mortar, which counts under the current
measures as savings. So Cooper would also count as savings
expenditure on consumer durables, education, and R&D—
which would give the United States a significantly higher sav­
ings rate. The new metric worldwide would raise the figure for
other nations as well, but the contribution of education, R & D ,

202 T H E P O S T - A M E R I C A N W O R L D

and consumer durables to total savings "is higher in the
United States than in most other countries, except perhaps for
a few Nordic countries."*

With all these caveats, the United States still has serious
problems. Many trends relating to the macroeconomic picture
are worrisome. Whatever the savings rate, it has fallen fast
over the past two decades. By all calculations, Medicare
threatens to blow up the federal budget. The swing from sur­
pluses to deficits between 2000 and 2008 has serious implica­
tions. For most families, moreover, incomes are flat or rising
very slowly Growing inequality is the signature feature of the
new era fueled by a triple force—the knowledge economy,
information technology, and globalization. Perhaps most wor-
ryingly, Americans are borrowing 80 percent of the world's sur­
plus savings and using it for consumption. In other words, we
are selling off our assets to foreigners to buy a couple more
lattes a day. These problems have accumulated at a bad time
because, for all its strengths, the American economy now
faces its strongest challenge in history.

Everyone Is Playing the Game

Let me begin with an analogy drawn from my favorite sport,
tennis. American tennis enthusiasts have noted a worrying
recent trend: the decline of America in championship tennis.
The New York Times' Aron Pilhofer ran the numbers. Thirty

* Consumer durables, education, and R&D amount to 8.6 percent, 7.3 percent, and
2.8 percent of GDP, respectively. Adding this to the 15 percent saved by more tradi­
tional means yields just over 3 3 percent of G D P in national savings.

AMERICAN POWER 203

years ago, Americans made up half the draw (the 128 players
selected to play) in the U.S. Open. In 1982, for example, 7 8 of
the 128 players selected were Americans. In 2007, only 2 0
Americans made the draw, a figure that accurately reflects the
downward trend over twenty-five years. Millions of pixels have
been devoted to wondering how America could have slipped
so far and fast. The answer lies in another set of numbers. In
the 1970s, about twenty-five countries sent players to the U.S.
Open. Today, about thirty-five countries do, a 4 0 percent
increase. Countries like Russia, South Korea, Serbia, and Aus­
tria are now churning out world-class players, and Germany,
France, and Spain are training many more players than ever
before. In the 1970s, three Anglo-Saxon nations—America,
Britain, and Australia—utterly dominated tennis. In 2007, the
final-sixteen players came from ten different countries. In
other words, it's not that the United States has been doing
badly over the last two decades. It's that, all of a sudden, every­
one is playing the game.

If tennis seems trivial, consider a higher-stakes game. In
2005, New York City got a wake-up call. Twenty-four of the
world's twenty-five largest initial public offerings (IPOs) that
year were held in countries other than the United States. This
was stunning. America's capital markets have long been the
biggest, deepest, and most liquid in the world. They financed
the turnaround in manufacturing in the 1980s, the technology
revolution of the 1990s, and the ongoing advances in bio­
science. It was the fluidity of these markets that had kept
American business nimble. If America was losing this distinc­
tive advantage, it was very bad news. The worry was great
enough that Mayor Michael Bloomberg and Senator Chuck
Schumer of New York commissioned McKinsey and Com-

204 THE P O S T - A M E R I C A N W O R L D

pany to do a report assessing the state of New York's financial
competitiveness. It was released late in 2 0 0 6 . 2 2

Much of the discussion around the problem focused on
America's overregulation, particularly with post-Enron laws
like Sarbanes-Oxley and the constant threat of litigation that
hovers over business in the United States. These findings
were true enough, but they did not really get at what had
shifted business abroad. America was conducting business as
usual. But others were joining in the game. Sarbanes-Oxley
and other such regulatory measures would not have had
nearly the impact they did had it not been for the fact that
there are now alternatives. What's really happening here, as in
other areas, is simple: the rise of the rest. America's sum total
of stocks, bonds, deposits, loans, and other instruments—its
financial stock, in other words—still exceeds that of any other
region, but other regions are seeing their financial stock grow
much more quickly. This is especially true of the rising coun­
tries of Asia—at 15.5 percent annually between 2001 and
2005—but even the Eurozone's is outpacing America's,
which clips along at 6.5 percent. Europe's total banking and
trading revenues, $ 9 8 billion in 2005, have nearly pulled
equal to U.S. revenues of $109 billion. In 2001, 57 percent of
high-value IPOs occurred on American stock exchanges; in
2005, just 16 percent did. In 2006, the United States hosted
barely a third of the number of total IPOs it did in 2 0 0 1 ,
while European exchanges expanded their IPO volume by 30
percent, and in Asia (minus Japan) volume doubled. IPOs
are important because they generate "substantial recurring
revenues for the host market" and contribute to perceptions
of market vibrancy

AMERICAN POWER 205

IPOs and foreign listings are only part of the story. New
derivatives based on underlying financial instruments like
stocks or interest-rate payment are increasingly important
for hedge funds, banks, insurers, and the overall liquidity of
international markets. And the dominant player on the inter­
national derivatives market (estimated at a notional value of
$300 trillion) is London. London exchanges account for 4 9
percent of the foreign-exchange derivatives market and 34
percent of the interest-rate derivatives market. (The United
States accounts for 16 percent and 4 percent of these mar­
kets, respectively.) European exchanges as a whole represent
greater than 60 percent of the interest rate, foreign
exchange, equity, and fund-linked derivatives. McKinsey s
interviews with global business leaders indicate that Europe
dominates not only in existing derivatives products but also
in the innovation of new ones. The only derivatives product
in terms of which Europe trails the U . S . is commodities,
which accounts for the lowest overall revenue among major
derivatives categories.

There were some specific reasons for the fall. Many of the
massive IPOs in 2005 and 2 0 0 6 were privatizations of state-
owned companies in Europe and China. The Chinese ones
naturally went to Hong Kong, and the Russian and Eastern
European ones to London. In 2006, the three biggest IPOs all
came from emerging markets. But this is all part of a broader
trend. Countries and companies now have options that they
never had before. Capital markets outside America—chiefly
Hong Kong and London—are well regulated and liquid, which
allows companies to take other factors, such as time zones,
diversification, and politics, into account.

206 THE P O S T - A M E R I C A N W O R L D

The United States is not doing worse than usual. It func­
tions as it always has—perhaps subconsciously assuming that
it is still leagues ahead of the pack. American legislators rarely
think about the rest of the world when writing laws, regula­
tions, and policies. American officials rarely refer to global
standards. After all, for so long the United States was the
global standard, and when it chose to do something different,
it was important enough that the rest of the world would cater
to its exceptionality. America is the only country in the world,
other than Liberia and Myanmar, that is not on the metric sys­
tem. Other than Somalia, it is alone in not ratifying the inter­
national Convention on the Rights of the Child. In business,
America didn't need to benchmark. It was the one teaching
the world how to be capitalist. But now everyone is playing
America's game, and playing to win.

For the last thirty years, America had the lowest corporate
tax rates of the major industrialized countries. Today, it has the
second highest. American rates have not gone up; others have
come down. Germany, for example, long a staunch believer in
its high-taxation system, cut its rates (starting in 2008) in
response to moves by countries to its east, like Slovakia and
Austria. This kind of competition among industrialized coun­
tries is now widespread. It is not a race to the bottom—
Scandinavian countries have high taxes, good services, and
strong growth—but a quest for growth. American regulations
used to be more flexible and market friendly than all others.
That's no longer true. London's financial system was over­
hauled in 2001, with a single entity replacing a confusing mish­
mash of regulators, one reason that London's financial sector
now beats out New York's on some measures. The entire
British government works aggressively to make London a

AMERICAN POWER 207

global hub. Washington, by contrast, spends its time and
energy thinking of ways to tax New York, so that it can send its
revenues to the rest of the country. Regulators from Poland to
Shanghai to Mumbai are moving every day to make their sys­
tems more attractive to investors and manufacturers all over
the world. Even on immigration, the European Union is creat­
ing a new "blue card," to attract highly skilled workers from
developing countries.

Being on top for so long has its downsides. The American
market has been so large that Americans have always known
that the rest of the world would take the trouble to understand
it and them. We have not had to reciprocate by learning for­
eign languages, cultures, and markets. Now that could leave
America at a competitive disadvantage. Take the spread of
English worldwide as a metaphor. Americans have delighted
in this process because it makes it so much easier for them to
travel and do business abroad. But for the locals, it gives them
an understanding of and access to two markets and cultures.
They can speak English but also Mandarin or Hindi or Por­
tuguese. They can penetrate the American market but also the
internal Chinese, Indian, or Brazilian one. (And in all these
countries, the non-English-speaking markets remain the
largest ones.) Americans, by contrast, can swim in only one
sea. They have never developed the ability to move into other
peoples' worlds.

We have not noticed how fast the rest has risen. Most of the
industrialized world—and a good part of the nonindustrialized
world as well—has better cell phone service than the United
States. Broadband is faster and cheaper across the industrial
world, from Canada to France to Japan, and the United States
now stands sixteenth in the world in broadband penetration

208 THE P O S T - A M E R I C A N W O R L D

per capita. Americans are constantly told by their politicians
that the only thing we have learn from other countries' health
care systems is to be thankful for ours. Most Americans ignore
the fact that a third of the country's public schools are totally
dysfunctional (because their children go to the other two-
thirds). The American litigation system is now routinely
referred to as a huge cost to doing business, but no one dares
propose any reform of it. Our mortage deduction for housing
costs a staggering $ 8 0 billion a year, and we are told it is cru­
cial to support home ownership. Except that Margaret
Thatcher eliminated it in Britain, and yet that country has the
same rate of home ownership as the United States. We rarely
look around and notice other options and alternatives, con­
vinced that "we're number one." But learning from the rest is
no longer a matter of morality or politics. Increasingly it's
about competitiveness.

Consider the automobile industry. For a century after 1894,
most of the cars manufactured in North America were made
in Michigan. Since 2004, Michigan has been replaced by
Ontario, Canada. The reason is simple: health care. In Amer­
ica, car manufacturers have to pay $6,500 in medical and
insurance costs for every worker. If they move a plant to
Canada, which has a government-run health care system, the
cost to the manufacturer is around $ 8 0 0 per worker. In 2006,
General Motors paid $5.2 billion in medical and insurance
bills for its active and retired workers. That adds $1,500 to the
cost of every G M car sold. For Toyota, which has fewer Amer­
ican retirees and many more foreign workers, that cost is $186
per car. This is not necessarily an advertisement for the Cana­
dian health care system, but it does make clear that the costs
of the American health care system have risen to a point that

AMERICAN POWER 209

there is a significant competitive disadvantage to hiring Amer­
ican workers. Jobs are going not to countries like Mexico but
to places where well-trained and educated workers can be
found: it's smart benefits, not low wages, that employers are
looking for. Tying health care to employment has an additional
negative consequence. Unlike workers anywhere else in the
industrialized world, Americans lose their health care if they
lose their job, which makes them far more anxious about for­
eign competition, trade, and globalization. The Pew survey
found greater fear of these forces among Americans than
among German and French workers, perhaps for this reason.

For decades, American workers, whether in car companies,
steel plants, or banks, had one enormous advantage over all
other workers: privileged access to American capital. They
could use that access to buy technology and training that no
one else had—and thus produce products that no one else
could, and at competitive prices. That special access is gone.
The world is swimming in capital, and suddenly American
workers have to ask themselves, what can we do better than
others? It's the dilemma not just for workers but for companies
as well. What's critical now is not how a company compares
with its own past (are we doing better than we were?), but how
it compares with the present elsewhere (how are we doing rel­
ative to others?). The comparison is no longer along a vertical
dimension of time but along a horizontal one of space.

When American companies went abroad, they used to bring
with them capital and know-how. But when they go abroad
now, they discover that the natives already have money and
already know how. There really isn't a Third World anymore.
So what do American companies bring to India or Brazil?
What is America's competitive advantage? It's a question few

210 THE P O S T - A M E R I C A N W O R L D

American businessmen thought they would ever have to
answer. The answer lies in something the economist Martin
Wolf noted. Describing the changing world, he wrote that
economists used to discuss two basic concepts, capital and
labor. But these are now commodities, widely available to
everyone. What distinguishes economies today are ideas and
energy. A country must be a source of either ideas or energy
(meaning oil, natural gas, coal, etc.). The United States has
been and can be the world's most important, continuing
source of new ideas, big and small, technical and creative, eco­
nomic and political. But to do that, it has to make some signif­
icant changes.

A Do-nothing Politics

The United States has a history of worrying that it is losing its
edge. This is at least the fourth wave of such concern since
1945. The first was in the late 1950s, a result of the Soviet
Union's launch of the Sputnik satellite. The second was in the
early 1970s, when high oil prices and slow growth in the
United States convinced Americans that Western Europe and
Saudi Arabia were the powers of the future, and President
Nixon heralded the advent of a multipolar world. The most
recent one arrived in the mid-1980s, when most experts
believed that Japan would be the technologically and econom­
ically dominant superpower of the future. The concern in each
of these cases was well founded, the projections intelligent.
But none of these scenarios came to pass. The reason is that
the American system was proved be flexible, resourceful, and
resilient, able to correct its mistakes and shift its attention. A

AMERICAN POWER 211

focus on American economic decline ended up preventing it.
The problem today is that the American political system
seems to have lost its ability to create broad coalitions that
solve complex issues.

The economic dysfunctions in America today are real, but,
by and large, they are not the product of deep inefficiencies
within the American economy, nor are they reflections of cul­
tural decay. They are the consequences of specific government
policies. Different policies could quickly and relatively easily
move the United States onto a far more stable footing. A set
of sensible reforms could be enacted tomorrow to trim waste­
ful spending and subsidies, increase savings, expand training
in science and technology, secure pensions, create a workable
immigration process, and achieve significant efficiencies in
the use of energy.* Policy experts do not have wide disagree­
ments on most of these issues, and none of the proposed
measures would require sacrifices reminiscent of wartime
hardship, only modest adjustments of existing arrangements.
And yet, because of politics, they appear impossible. The
American political system has lost the ability for large-scale
compromise, and it has lost the ability to accept some pain
now for much gain later on.

As it enters the twenty-first century, the United States is not
fundamentally a weak economy, or a decadent society. But it
has developed a highly dysfunctional politics. An antiquated
and overly rigid political system to begin with—about 225

* I would not add fixing health care to this list, because that is not an easy problem
with an easy fix. Most problems in Washington have simple policy solutions but face
political paralysis. Health care is an issue that is complex in both policy and political
terms. That doesn't mean it doesn't need to be fixed, far from it. But solving it would
have been difficult under any circumstances, as it is today.

212 T H E P O S T - A M E R I C A N W O R L D

years old—has been captured by money, special interests, a
sensationalist media, and ideological attack groups. The result
is ceaseless, virulent debate about trivia—politics as theater—
and very little substance, compromise, and action. A "can-do"
country is now saddled with a "do-nothing" political process,
designed for partisan battle rather than problem solving. By
every measure—the growth of special interests, lobbies, pork-
barrel spending—the political process has become far more
partisan and ineffective over the last three decades.

It is clever contrarianism to be in favor of sharp party poli­
tics and against worthy calls for bipartisanship. Some political
scientists have long wished that America's political parties
were more like European ones—ideologically pure and tightly
disciplined. Well, it has happened—there are fewer and fewer
moderates on either side—and the result is gridlock. Europe's
parliamentary systems work well with partisan parties. In
them, the executive branch always controls the legislative
branch, and so the party in power can implement its agenda
easily. The British prime minister doesn't need any support
from the opposition party; he has a ruling majority by defini­
tion. The American system, by contrast, is one of shared
power, overlapping functions, and checks and balances.
Progress requires broad coalitions between the two parties
and politicians who will cross the aisle. That's why James
Madison distrusted political parties, lumping them together
with all kinds of "factions" and considering them a grave dan­
ger to the young American Republic.

I know that these complaints all sound very high-minded
and squishy. And I know there has long been nasty partisanship
in America, even in Madison's own era. But there has also been
a lot of bipartisanship, especially over the past century. React-

AMERICAN POWER 213

ing to the political bitterness of the late nineteenth century—
the last time there were two close elections in succession—
many American leaders tried to create forces for good,
problem-solving government. Robert Brookings established
the Brookings Institution in Washington in 1916 because he
wanted an organization "free from any political or pecuniary
interest... to collect, interpret, and lay before the country in a
coherent form, the fundamental economic facts." The Council
on Foreign Relations, founded five years later, also consciously
reached across party lines. The first editor of its magazine, For­
eign Affairs, told his deputy that if one of them became publicly
identified as a Democrat, the other should immediately start
campaigning for the Republicans. Contrast that with a much
more recently founded think tank, the conservative Heritage
Foundation, whose former senior vice president Burton Pines
has admitted, "Our role is to provide conservative policymakers
with arguments to bolster our side."

The trouble is that progress on any major problem—health
care, Social Security, tax reform—will require compromise
from both sides. In foreign policy, crafting a strategic policy in
Iraq, or one on Iran, North Korea, or China, will need signifi­
cant support from both sides. It requires a longer-term per­
spective. And that's highly unlikely. Those who advocate
sensible solutions and compromise legislation find themselves
marginalized by the party's leadership, losing funds from
special-interest groups, and being constantly attacked by their
"side" on television and radio. The system provides greater
incentives to stand firm and go back and tell your team that
you refused to bow to the enemy. It's great for fund-raising,
but it's terrible for governing.

The real test for the United States is, in some ways, the

214 THE P O S T - A M E R I C A N W O R L D

opposite of that faced by Britain in 1900. Britain's economic
power waned while it managed to maintain immense political
influence around the world. The American economy and
American society, in contrast, are capable of responding to the
economic pressures and competition they face. They can
adjust, adapt, and persevere. The real test for the United
States is political—and it rests not just with America at large
but with Washington in particular. Can Washington adjust and
adapt to a world in which others have moved up? Can it
respond to shifts in economic and political power? This chal­
lenge is even more difficult in foreign policy than in domestic
policy. Can Washington truly embrace a world with a diversity
of voices and viewpoints? Can it thrive in a world it cannot
dominate?

American Purpose

hen historians try to understand the world of the

w early twenty-first century, they should take note of
the Parsley crisis. In July 2002, the government of

Morocco sent twelve soldiers to a tiny island called Leila, a few

hundred feet off its coast, in the Straits of Gibraltar, and

planted its flag there. The island is uninhabited, except for

some goats, and all that thrives on it is wild parsley, hence its

Spanish name, Perejil. But its sovereignty had long been con­

tested by Morocco and Spain, and the Spanish government

reacted forcefully to the Moroccan "aggression." Within a cou­

ple of weeks, seventy-five Spanish soldiers had been airlifted

onto the island. They pulled down the Moroccan flag, hoisted

two Spanish flags, and sent the Moroccans home. The Moroc­

can government denounced the "act of war" and organized ral­

lies, where scores of young men chanted, "Our souls and our

blood are sacrifices to you, Leila!" Spain kept its military heli­

copters hovering over the island and its warships off the coast

of Morocco. From afar, the whole affair looked like a comic

216 THE P O S T - A M E R I C A N W O R L D

opera. But however absurd it may have seemed, someone was
going to have to talk the two countries down.

That role fell not to the United Nations, or to the European
Union, or to a friendly European country like France, which
has good relations with both sides. It fell to the United States.
"I kept thinking to myself, 'What do I have to do with any of
this? Why are we—the United States—in the middle of it?'"
then-Secretary of State Colin Powell recalled amusedly. Once
it became clear that nothing else was working, he began a hec­
tic round of telephone diplomacy, placing more than a dozen
calls to the Moroccan king and foreign minister late into Fri­
day night and Saturday morning. "I decided that I had to push
for a compromise fast because otherwise pride takes over,
positions harden, and people get stubborn," said Powell. "It
was getting to be evening in the Mediterranean. And my
grandkids were going to come over soon for a swim!" So Pow­
ell drafted an agreement on his home computer, got both sides
to accept it, then signed for each side himself, and faxed it
over to Spain and Morocco. The countries agreed to leave the
island unoccupied and begin talks, in Rabat, about its future
status. The two governments issued statements thanking the
United States for helping to resolve the crisis. And Colin Pow­
ell got to go swimming with his grandkids.

It is a small example, but a telling one. The United States
has no interests in the Strait of Gibraltar. Unlike the European
Union, it has no special leverage with Spain or Morocco.
Unlike the United Nations, it cannot speak for the interna­
tional community. But it was the only country that could
resolve the dispute, for a simple, fundamental reason. In a
unipolar world, it is the single superpower.

The summer of 2002 will be seen as the high-water mark of

AMERICAN PURPOSE 217

unipolarity, America's Roman moment. The decade leading up
to it was a heady time. The economy was roaring, productivity
growth was higher than it had been in decades, Washington
was churning out massive surpluses, the dollar was sky-high,
and American C E O s were global superstars. Then the world
saw the United States brutally attacked in September 2 0 0 1 ,
producing feelings of sympathy as well as some quiet glee that
even a superpower could be humbled. But soon, while Amer­
ica felt weak and vulnerable, the world watched it respond to
9/11 on a scale that was unimaginable for any other country.
Washington immediately increased its defense budget by $50
billion, a sum greater than the total annual defense budgets of
Britain and Germany It single-handedly put terrorism at the
top of the global agenda, making every country reorient its for­
eign policy accordingly. Pakistan, which was allied with the
Taliban for years, turned against it within a week. Within a
month, the United States had attacked Afghanistan, seven
thousand miles away, almost entirely from the air, and quickly
toppled the regime.

That was then. America remains the global superpower
today, but it is an enfeebled one. Its economy has troubles, its
currency is sliding, and it faces long-term problems with its
soaring entitlements and low savings. Anti-American senti­
ment is at an all-time high everywhere from Great Britain to
Malaysia. But the most striking shift between the 1990s and
now has to do not with America but rather with the world at
large. In the 1990s, Russia was completely dependent on
American aid and loans. Now, it posts annual budget sur­
pluses in the tens of billions of dollars. Then, East Asian
nations desperately needed the I M F to bail them out of their
crises. Now, they have massive foreign-exchange reserves,

218 THE P O S T - A M E R I C A N W O R L D

which they are using to finance America's debt. Then, China's
economic growth was driven almost entirely by American
demand. In 2007, China contributed more to global growth
than the United States did—the first time any nation has done
so since at least the 1930s—and surpassed it as the world's
largest consumer market in several key categories.

In the long run this secular trend—the rise of the rest—will
only gather strength, whatever the temporary ups and downs.
At a military-political level, America still dominates the world,
but the larger structure of unipolarity—economic, financial,
cultural—is weakening. Washington still has no true rival, and
will not for a very long while, but it faces a growing number of
constraints. Polarity is not a binary condition. The world will
not stay unipolar for decades and then, one day, suddenly
switch and become bipolar or multipolar. There will be a slow
shift in the nature of international affairs. While unipolarity
continues to be a defining reality of the international system
for now, every year it becomes weaker and other nations and
actors grow in strength.

This power shift could be broadly beneficial. It is a product
of good things—robust economic growth and stability around
the world. And it is good for America, if approached properly.
The world is going America's way Countries are becoming
more open, market friendly, and democratic. As long as we
keep the forces of modernization, global interaction, and
trade growing, good governance, human rights, and democ­
racy all move forward. That movement is not always swift.
There are often setbacks, but the basic direction is clear. Look
at Africa, which is often seen as the most hopeless continent
in the world. Today two-thirds of the continent is democratic
and growing economically.

AMERICAN PURPOSE 219

These trends provide an opportunity for the United States
to remain the pivotal player in a richer, more dynamic, more
exciting world. But grasping that opportunity will take a sub­
stantial shift in America's basic approach to the world. There
is only so much America can do about its relative power. As
others grow from low starting points, its relative weight will
slip. But there is a great deal that Washington can do to rede­
fine America's purpose.

The Virtues of Competition

How did the United States blow it? The United States has had
an extraordinary hand to play in global politics—the best of
any country in history. Yet, by almost any measure—problems
solved, success achieved, institutions built, reputation
enhanced—Washington has played this hand badly. America
has had a period of unparalleled influence. What does it have
to show for it?

Beyond specific personalities and policies, about which
much has been written, the condition that made such errors
possible was, ironically, America's immense power. Americans
firmly believe in the virtues of competition. We believe that
individuals, groups, and corporations perform better when
they are in a competitive environment. When it comes to the
international arena, we have forgotten this fact. Ever since the
collapse of the Soviet Union, the United States has walked
the world like a colossus, unrivaled and unchecked. This has
had its benefits, but it has also made Washington arrogant,
careless, and lazy. Its foreign policy has at times resembled
General Motors' business strategy in the 1970s—an approach

220 THE P O S T - A M E R I C A N W O R L D

driven by internal factors, with little sense of the broader envi­
ronment in which it was operating. It didn't work so well for
G M , and it hasn't for the United States.

We didn't start out careless. Most politicians and policy
experts, American and foreign, were slow to embrace unipo­
larity. In 1990, as the Soviet Union was collapsing, Margaret
Thatcher expressed a commonly held view that the world was
moving toward three regional groups, "one based on the dol­
lar, one based on the yen, one on the Deutsche mark."1
George H. W. Bush, steeped in the bipolar order, never acted
like the head of the sole superpower. He took a cautious
approach to the historic changes in the global system. Rather
than triumphantly claiming victory in the Cold War, his
administration carefully consolidated the gains of Soviet col­
lapse, always aware that the process could either reverse or
end in violence. In waging the first Gulf War, Bush was highly
attentive to building an international coalition, getting United
Nations approval, and sticking to the mandate that gave the
war its legitimacy. With the United States beset by a recession
and mounting deficits, Bush sent his secretary of state, James
Baker, around the world hat in hand to raise funds for the war.
His great foreign policy achievement, German unification,
was won not through unilateral force but through collabora­
tive diplomacy—even though the United States held all the
trump cards at the time. Germany was unified within the
Western alliance, and 340,000 Russians quietly left East Ger­
many—all with Moscow's acquiescence.

Some did recognize that, with the Soviet Union in tatters,
the United States was the only "pole" left standing. But they
assumed that unipolarity was a passing phase, a "moment," in
one columnist's phrase.2 Talk of American weakness domi-

AMERICAN PURPOSE 221

nated the 1992 presidential election. "The Cold War is over:
Japan and Germany won," Paul Tsongas said throughout his
campaign for the Democratic nomination. Henry Kissinger, in
his 1994 book Diplomacy, predicted the emergence of a new
multipolar world, a view held by most scholars. Europeans
believed that they were on the path to unity and world
power, and Asians spoke confidently of the rise of "the Pacific
Century."

Despite these claims, foreign problems, no matter how dis­
tant, always seemed to end up in Washington's lap. When the
crisis in the Balkans began in 1991, the president of the Euro­
pean Council, Jacques Poos of Luxembourg, declared, "This is
the hour of Europe. If one problem can be solved by the Euro­
peans it is the Yugoslav problem. This is a European country
and it is not up to the Americans." It was not an unusual or
an anti-American view; most European leaders, including
Thatcher and Helmut Kohl, shared it. But several bloody years
later, it was left to America to stop the fighting. When Kosovo
erupted later that decade, Europe immediately let Washington
take the lead. The same pattern emerged in the East Asian
economic crisis, East Timor's struggle for independence, suc­
cessive Middle East conflicts, and Latin American debt
defaults. Other countries were often part of the solution, but,
unless America intervened, the crisis persisted. And at the
same time, the American economy was in its longest boom
since World War II, actually increasing its share of world out­
put as Europe and Japan stagnated.

When Bill Clinton came into office in 1993, he promised to
stop worrying about foreign policy and to focus "like a laser
beam" on the economy. But the pull of unipolarity was strong.
By his second term, he had become a foreign policy presi-

222 T H E P O S T - A M E R I C A N W O R L D

dent, spending most of his time, energy, and attention on
matters like Middle East peace and the Balkan crisis. George
W. Bush, reacting to what he saw as a pattern of over-
involvement in international affairs—from economic bailouts
to nation building—promised on the campaign trail to scale
back America's commitments. Then came his presidency and,
more important, 9/11.

Through the Clinton years, American power became more
apparent, Washington became more assertive, and foreign
governments became more resistant. Some of Clinton's eco­
nomic advisers, like Mickey Cantor and Lawrence Sum­
mers, were accused of arrogance in their dealings with other
countries. Diplomats like Madeleine Albright and Richard
Holbrooke were disparaged in Europe for talking about
America as, in Albright's phrase, the "indispensable nation."
The French foreign minister Hubert Védrine devised the
term "hyperpower"—which he did not mean as a term of
endearment—during the 1990s.3

But all these complaints were polite chatter compared with
the hostility aroused by George W Bush. For several years, the
Bush administration practically boasted of its disdain for
treaties, multilateral organizations, international public opin­
ion, and anything that suggested a conciliatory approach to
world politics. By Bush's second term, when the failure of this
confrontational approach was clear, the administration had
started to change course on many fronts, from Iraq to the
Israeli-Palestinian peace process to North Korea. But the new
policies were adopted belatedly, with considerable muttering
and grumbling and with elements of the administration utterly
unreconciled to the new strategy.

To understand the Bush administration's foreign policy, it is

AMERICAN PURPOSE 223

not enough to focus on Dick Cheney's and Donald Rumsfeld's
"Jacksonian" impulses or Bush's Texas background or the
nefarious neoconservative conspiracy The crucial enabling
factor for the Bush policies was 9/11. For a decade prior to the
attacks, the United States had been unchecked on the world
stage. But several domestic constraints—money, Congress,
public opinion—made it difficult for Washington to pursue a
unilateral and combative foreign policy. Military interventions
and foreign aid were both unpopular, as the public wanted the
United States to retreat from the world after the rigors of the
Cold War. The Balkan interventions, NATO expansion, aid to
Russia, all required considerable effort from the Clinton
administration, often pushing uphill, despite the fact that
these were relatively small ventures that cost little in
resources. But 9/11 changed all that. It broke the domestic
constraints on American foreign policy. After that terrible
attack, Bush had a united country and a largely sympathetic
world. The Afghan War heightened the aura of American
omnipotence, emboldening the most hard-line elements in the
administration, who used that success as an argument for
going to war with Iraq quickly and doing so in a particularly
unilateral manner. The United States didn't need the rest of
the world or the old mechanisms of legitimacy and coopera­
tion. It was the new global empire that would create a new
reality—so the argument went. The formula to explain Bush's
foreign policy is simple:

Unipolarity + 9/11 + Afghanistan = Unilateralism + Iraq.*

* It is not a subject for this book, but I was in favor of the effort to oust Saddam Hus­
sein, though I argued from the start for a much larger force and an internationally sanc­
tioned intervention and occupation. My reasoning was mostly related to the fact that

224 THE P O S T - A M E R I C A N W O R L D

It was not just the substance of American policy that
changed in the unipolar era. So did the style, which has
become imperial and imperious. There is much communica­
tion with foreign leaders, but it's a one-way street. Other gov­
ernments are often simply informed of U.S. policy. Senior
American officials live in their own bubbles, rarely having any
genuine interaction with their overseas counterparts, let alone
other foreigners. "When we meet with American officials, they
talk and we listen—we rarely disagree or speak frankly because
they simply can't take it in. They simply repeat the American
position, like the tourist who thinks he just needs to speak
louder and slower and then we will all understand," a senior for­
eign policy adviser in a major European government told me.

"Even for a senior foreign official dealing with the US
administration," writes the solidly pro-American Christopher
Patten, recounting his experience as Europe's commissioner
for external affairs, "you are aware of your role as a tributory:
however courteous your hosts, you come as a subordinate
bearing goodwill and hoping to depart with a blessing on your
endeavours. . . . In the interests of the humble leadership to
which President Bush rightly aspires, it would be useful for

Western policy toward Iraq had collapsed—sanctions were leaking, countless civillians
were dying because of the embargo, Al Qaeda was enraged by our base in Saudi Arabia,
from which we operated the no-fly zone—and I believed that a more modern and mod­
erate Iraq in the middle of the Arab world would help break the dysfunctional political
dynamics of the Arab world. I opposed, from the first few weeks, Washington's occupa­
tion policies. In retrospect, I underestimated not merely the administration's arrogance
and incompetence but also the inherent difficulty of the task. I continue to believe that
a modern, moderate Iraq would make an important difference in the politics of the
Middle East. I hope that Iraq will, in the long run, evolve into such a place, but the costs
have been ruinously high—for Americans, for America's reputation, but especially for
Iraqis. And foreign policy is a matter of costs and benefits, not theology.

AMERICAN PURPOSE 225

some of his aides to try to get in to their own offices for a
meeting with themselves some time!" Patten continues,
"Attending any conference abroad, American Cabinet officers
arrive with the sort of entourage that would have done Darius
proud. Hotels are commandeered; cities are brought to a halt;
innocent bystanders are barged into corners by thick-necked
men with bits of plastic hanging out of their ears. It is not a
spectacle that wins hearts and minds."4

President Bush's foreign trips seem designed to require as lit­
tle contact as possible with the countries he visits. He is usually
accompanied by two thousand or so Americans, as well as sev­
eral airplanes, helicopters, and cars. He sees little except
palaces and conference rooms. His trips involve almost no
effort to demonstrate respect and appreciation for the country
and culture he is visiting. They also rarely involve any meetings
with people outside the government—businessmen, civil soci­
ety leaders, activists. Even though the president's visit must be
highly programmed by definition, a broader effort to touch the
people in these foreign lands would have great symbolic value.
Consider an episode involving Bill Clinton and India. In May
1998, India detonated five underground nuclear devices. The
Clinton administration roundly condemned New Delhi, levied
sanctions, and indefinitely postponed a planned presidential
visit. The sanctions proved painful, by some estimates costing
India one percent of G D P growth over the next year. Eventually
Clinton relented and went to India in March 2000. He spent
five days in the country, visited famous sights, put on traditional
clothes, and took part in dances and ceremonies. He communi­
cated the message that he enjoyed and admired India as a coun­
try and civilization. The result was a transformation. Clinton is
a rock star in India. And George W. Bush, despite being the

226 THE P O S T - A M E R I C A N W O R L D

most pro-Indian president in American history, commands
none of this attention, affection, or respect. Policy matters but
so does the symbolism surrounding it.

Apart from the resentment that the imperial style produces,
it ensures that American officials don't benefit from the expe­
rience and expertise of foreigners. The U N inspectors in Iraq
were puzzled by how uninterested U.S. officials were in talk­
ing to them before the war. The Americans, comfortably
ensconced in Washington, lectured the inspectors—who had
spent weeks combing through Iraq—on the evidence of
weapons of mass destruction. "I thought they would be inter­
ested in our firsthand reports on what those supposedly dual-
use factories looked like," one inspector told me. "But no, they
explained to me what those factories were being used for."

To foreigners, American officials seem clueless about the
world they are supposed to be running. "There are two sets of
conversations, one with Americans in the room and one with­
out," says Kishore Mahbubani, who was formerly Singapore's
foreign secretary and ambassador to the United Nations.
Because Americans live in a "cocoon," they don't see the "sea
change in attitudes towards America throughout the world."

This Time It's Different

It is too easy to dismiss the hostility that grew out of the Iraq
campaign as just envious anti-Americanism (even if some of it
is). American conservatives have claimed that there has been
large, popular opposition in Europe every time the United
States has taken strong military action—for example, when it
deployed Pershing nuclear missiles in Europe in the early

AMERICAN PURPOSE 227

1980s. In fact, the historical record highlights the opposite.
The street demonstrations and public protests against the Per­
shing deployments made for good television, but the reality
was that, in most polls, 30 to 4 0 percent of Europeans, and
often more, strongly supported American policies. Even in
Germany, where pacifist feelings ran sky-high, 53 percent of
the population supported the Pershing deployments, accord­
ing to a 1981 poll in Der Spiegel. A majority of the French sup­
ported American policy through much of Ronald Reagan's two
terms, even preferring him to the Democratic candidate in the
1984 election, Walter Mondale. Today, in contrast, staggering
majorities in most European countries—as high as 80 percent
in many places—oppose U.S. foreign policy and even say that
the United States is the greatest threat to world peace.

Josef Joffe, one of Germany's leading international affairs
commentators, observes that, during the Cold War, anti-
Americanism was a left-wing phenomenon. "In contrast to it,
there was always a center-right that was anti-communist and
thus pro-American," he explains. "The numbers waxed and
waned, but you always had a solid base of support for the
United States." In short, the Cold War kept Europe pro-
American. The year 1968, for example, saw mass protests
against American policies in Vietnam, but it was also the year
of the Soviet invasion of Czechoslovakia. Europeans (and
Asians) could oppose America, but their views were balanced
by wariness of the Soviet threat. Again, the polls bear this out.
European opposition even to the Vietnam War never
approached the level of the opposition to Iraq. This was true
outside Europe as well. In Australia, a majority of the public
supported that country's participation in the Vietnam War
through 1971, when it withdrew its forces.

228 THE P O S T - A M E R I C A N W O R L D

For most of the world, the Iraq War was not about Iraq.
"What does Mexico or Chile care about who rules in Bagh­
dad?" Jorge Castaneda, the former foreign minister of Mexico,
told me. "It was about how the world's superpower wields its
power. That's something we all care deeply about." Even if Iraq
finally works out, that will solve only the Iraq problem. The
America problem will remain. People around the globe worry
about living in a world in which one country has so much
power. Even if they cannot contest this power, they can com­
plicate it. In the case of Iraq, no country could stop the United
States from going to war without international sanction, but
the rest of the world has made the effort more difficult by
largely sitting on the sidelines in the aftermath. As of this writ­
ing, not one Arab country has opened an embassy in Baghdad.
Non-Arab allies of the United States have not been much
more helpful.

Nicolas Sarkozy delights in being called "the American" and
even "the neoconservative" in France. He is unabashedly pro-
American and makes clear that he wants to emulate the
United States in many ways. When he met Condoleezza Rice
after his election as France's president, in May 2007, she
asked him, "What can I do for you?" His response was reveal­
ing. "Improve your image in the world," he said. "It's difficult
when the country that is the most powerful, the most success­
ful—that is, of necessity, the leader of our side—is one of the
most unpopular countries in the world. It presents overwhelm­
ing problems for you and overwhelming problems for your
allies. So do everything you can do to improve the way you're
perceived—that's what you can do for me."5

The neoconservative writer Robert Kagan argues that Euro­
pean and American differences over multilateral cooperation

AMERICAN PURPOSE 229

are a result of their relative strengths. When Europe's major
countries were the world's great powers, they celebrated
realpolitik and cared little for international cooperation. Since
Europe is now weak, according to Kagan, it favors rules and
restraints. America, for its part, wants complete freedom of
action: "Now that the United States is powerful, it behaves as
powerful nations do."6 But this argument misinterprets history
and misunderstands the unique place that America occupied
in twentieth-century diplomacy. America was the most power­
ful country in the world when it proposed the creation of the
League of Nations to manage international relations after
World War I. It was the dominant power at the end of World
War II, when it founded the United Nations, created the Bret-
ton Woods system of international economic cooperation, and
launched the world's key international organizations. America
had the world at its feet, but Franklin Delano Roosevelt and
Harry Truman chose not to create an American imperium.
Instead, they built an international order of alliances and mul­
tilateral institutions and helped get the rest of the world back
on its feet by pumping out vast amounts of aid and private
investment. The centerpiece of this effort, the Marshall Plan,
was worth $ 1 0 0 billion in today's dollars. For most of the
twentieth century, in other words, America embraced interna­
tional cooperation not out of fear and vulnerability but out of
confidence and strength.

Central to this approach was the special attention given to
diplomacy. Think of what it must have meant for Franklin
Roosevelt, at the pinnacle of power, to go halfway across the
world to Tehran and Yalta to meet with Churchill and Stalin in
1943 and 1945. Roosevelt was a sick man, paralyzed from the
waist down, hauling ten pounds of steel braces on his legs.

230 THE P O S T - A M E R I C A N W O R L D

Traveling for forty hours by sea and air took the life out of him.
He did not have to go. He had plenty of deputies—George
Marshall, Dwight Eisenhower—who could have done the job.
Or he could have summoned the other leaders to him. But
F D R understood that American power had to be coupled with
a generosity of spirit. He insisted that British commanders like
Montgomery be given their fair share of glory in the war. He
brought China into the U N Security Council, even though it
was a poor peasant society, because he believed that it was
important to have the largest Asian country properly repre­
sented within a world body.

The standard set by Roosevelt and his generation endured.
When Secretary of State Marshall devised the plan that bears
his name, he insisted that the initiative and control lie with
Europeans. For decades thereafter, the United States built
dams, funded magazines, and provided technical know-how to
other countries. It sent its scholars and students abroad so that
people got to know America and Americans. It paid deference
to its allies, even when they were in no sense equals. It con­
ducted joint military exercises with small nations, even when
they added little to U.S. readiness. For half a century, Ameri­
can presidents and secretaries of state circled the globe and
hosted their counterparts in a never-ending cycle of diplomacy.

All these exertions served our interests, of course. They pro­
duced a pro-American world that was rich and secure. They
laid the foundations for a booming global economy in which
others could participate and in which America thrived. But it
was an enlightened self-interest that took into account the
interests of others. Above all, it reassured countries—through
word and deed, style and substance—that America's mam­
moth power was not to be feared.

AMERICAN PURPOSE 231

New Rules for a New Age

Some Americans believe that we should not learn from history
but just copy it. If only we could find another Truman admin­
istration, many liberals and Democrats seem to pine, it would
establish a new set of institutions for a new era. But this is nos­
talgia, not strategy. When Truman, Acheson, and Marshall
built the postwar order, the rest of the world was in tatters.
People had seen the devastating effects of nationalism, war,
and economic protectionism. As a result, there was strong
support everywhere, especially in the United States, for a large
and generous effort to engage the world, raise it out of
poverty, create global institutions, and ensure international
cooperation—so that such a war never took place again.
America had the moral high ground that came from defeating
fascism, but it also had unrivaled power. American G D P made
up almost 50 percent of the global economy. Outside of the
Soviet sphere, Washington's lead role in devising new institu­
tions was never really questioned. Today, the world is different,
and so is America's position in it. Were Truman and Marshall
and Acheson alive, they would face a wholly new set of chal­
lenges. The task for today is to construct a new approach for a
new era, one that responds to a global system in which power
is far more diffuse than ever before and in which everyone
feels empowered.

The United States does not have the hand it had in 1945 or
even in 2000. Still, it does have a stronger hand than anyone
else—the most complete portfolio of economic, political, mil­
itary, and cultural power—and it will not be replaced in the
foreseeable future. Perhaps more importantly, we do not need

232 T H E P O S T - A M E R I C A N W O R L D

to invent the world anew. The international order established
by the United States after World War II is in urgent need of
expansion and repair, but not reconception. As the Princeton
scholar John Ikenberry has perceptively noted, the Western-
oriented system created in the 1940s and 1950s allows for the
expansion of global trade, the rise of new powers, and mecha­
nisms of cooperation and conflict management. It cannot
always and easily address certain problems, such as great
power conflict and internal human rights tragedies, but those
are the limits of international relations, not of these particular
structures. Simultaneously, the reality of nuclear weapons and
deterrence makes it extremely costly—suicidal—for a rising
power to try to assert itself militarily against its peers. "Today's
Western order, in short, is hard to overturn and easy to join,"
writes Ikenberry.7 That is how modern Japan and Germany
have seen their choices and how China and India seem to be
viewing their future. They want to gain power and status and
respect, for sure, but by growing within the international sys­
tem, not by overturning it. As long as these new countries feel
they can be accommodated, they have every incentive to
become "responsible stakeholders" in this system.

The rise of the rest, while real, is a long, slow process. And it
is one that ensures America a vital, though different, role. As
China, India, Brazil, Russia, South Africa, and a host of smaller
countries all do well in the years ahead, new points of tension
will emerge among them. Many of these rising countries have
historical animosities, border disputes, and contemporary
quarrels with one another; in most cases, nationalism will grow
along with economic and geopolitical stature. Being a distant
power, America is often a convenient partner for many regional
nations worried about the rise of a hegemon in their midst. In